Works great if the collateral assets go up in value against the dollar. But if say the $3000 of ETH you had as collateral goes to say $1000 ...
Its like taking out a mortgage using your locked up snowflake stock as collateral.
If you put in $3K of ETH and borrow $1500, then your ETH collateral falls to 150% of your loan ($2275), you will get liquidated, and your collateral will be sold immediately to pay your debt. These mechanics are fully on-chain and fully automated by keepers (a liquidation can be triggered by anyone and they earn penalty fees for doing so).
The system is not without risks, but those are well known to all.
But what you say is true of all debt markets. Debt has an inflating effect on the price, and when those debts get wiped off from liquidations, it can have a cascading affect in the opposite direction from that on the way up. That is precisely what happened to the real estate market in '08. People didn't think the real estate market could go down in terms of price. And yet, it did, and we had a major financial crisis as a result as real estate prices drew down 50% or more in some areas and foreclosure supply flooded the market.
So let's say you deposit 20 eth at @ $1,000 USD per eth, which gives you a collateral value of $20,000. You create $10,000 DAI which you can then do what you want with.
If the price of ETH goes down, and the value of your collateral drops to $14,500, less than 150% collateral, then DAI automatically holds an auction on your collateral, selling it to the highest bidder. Let's say it sells it for $14,000, that's a $500 profit for the purchaser, and a $4,000 profit to DAI. The looser here is you, who still has the $10,000 DAI, but has lost $14,500 in ETH.
Next time, you'll either top up, or pay back your vault before it gets to this point.
Same thing happened with the mortgage backed securities - even if they had some value (and everyone admitted they did) nobody could be found to buy them - hence "toxic" so the government stepped in and became the buyer of last resort.
That was a different market. We’ve experimented this with currency boards. Holding reserves in anything but your anchor currency is asking for trouble. Making public what your reserves are invites specific arbitrages.
The added fun with crypto is that the monetary base of ETH is tiny compared to most reserve currencies. So the instability point for DAI is far smaller, in terms of triggering a fire sale, than for a real currency board.
Side note: I guess we’re about 15 years out from 2008, the minimum term for a generational divide, and so I shouldn’t be surprised about people saying 150% collateral is pretty much safe again. Mortgages then. Ether now. Russian bonds before.
Rates were low. There is less dumb money now. And its quantity will predictably decline over the coming 12 to 18 months.
Its ~ USD 7bn now (vs ETH 220bn market cap - and not the only stable coin holding eth ...).
https://bravenewcoin.com/insights/maker-price-analysis-multi...
3% is a large enough fraction of value to induce fire sales at less than a 50% price drop. (I don't know precisely where below 50%. Nobody does.)
Every shaky currency board in the history of pegged currencies hobbled through attacks when hard currency was easy in the absence of a solvency crisis. Let's assume Tether doesn't de-peg and Celsius's ETH loan [1] doesn't spark a run. That leaves rates. In 2018, we had relatively easy money, taper tantrums aside. Today, we don't. And hard money is only getting tighter.
[1] https://www.bloomberg.com/news/articles/2022-06-13/bitcoin-s...
In the end maybe only gold can keep you safe ;)
11% of the ETF market is synthetic, and it is effectively illegal to launch one in the US now.
So it appeaers that its a) not half the ETFs and b) the regulator aggrees.
ETFs, hold the thing they are convertable to and are audited. the equivalent would be the stable coin having $1 in a bank account for every stable dollar they mint ... and be willing to be audited.
The SPX etf holds the actual constituent shares 1:1 with what they are redeemable as so it is a terrible example from your side. It doesnt hold a bunch of chinese equities, or discount miami property on a punt that it will do better than their underlying asset.
Stable coins have (not Dao as I agree they have a very nice fixed protocol) taken their 1:1 dollar backing, punted it on crypto, and when it went up and they were overcollateralised - paid themselves the excess personally. When crypto has gone down in value closed their eyes and eventually gone bust.
You can see the figures for the EU here¹, it's the exact opposite of what you're saying. Fully physically replicating ETFs are in the minority. The most common category is fully synthetic and together with the physically sampling ones and more exotic categories like derivative based, non-fully physically replicating ETFs constitute almost 3/4 of the entire market. The US is going to be similar but I invite you to look it up yourself.
¹ https://www.esrb.europa.eu/pub/pdf/asc/esrb.asc190617_9_cane...
[0] https://www.federalreserve.gov/econres/notes/feds-notes/synt... [1] https://www.nasdaq.com/articles/what-are-synthetic-etfs-2021...
> can't be true because even most physically replicating ETFs don't 1-1 hold all of the assets they purport to hold according to the index
Unfortunately they do hold the assets they purport to hold.
Nobody uses sampling for, say, an S&P500 fund.
>ETFs, hold the thing they are convertable to and are audited. the equivalent would be the stable coin having $1 in a bank account for every stable dollar they mint ... and be willing to be audited.
That is demonstrably false for the majority of ETFs, just read the above link. Holding some of the thing is not the same as being fully convertible. The user doesn't understand what sampling is and fixates on the word "synthetic" but it wasn't the original claim that most ETFs are fully synthetic in the first place. They don't have to be synthetic to not be 1-1 backed by all index constituents.
That isn't a claim about this being good or bad, many investors consider it acceptable risk.
1:0.9994
You happy?
https://www.marketwatch.com/investing/fund/spy/holdings
And to further correct the reccord:
the equivalent would be the stable coin having $0.9994 in a bank account for every stable dollar they mint not $0 (the $0.0006 was really the important bit in all this)
https://www.investopedia.com/articles/investing/111715/how-v...
The very fund you linked is exactly not fully replicating. Meaning some of the stocks from the index aren't in it.
Which stocks specifically? Their daily reporting has them owning every stock in the index.
https://www.ssga.com/us/en/intermediary/etfs/library-content...